(The following statement was released by the rating agency)
CHICAGO, January 14 (Fitch) A proposed methodology for the
nonbank, noninsurance financial institutions that pose systemic
risks to the
global economy appears unlikely to affect a large number of
according to Fitch Ratings.
The framework, outlined by the Financial Stability Board (FSB)
in a consultative
paper last week, includes preliminary sector-specific criteria
as a systemically important financial institution (SIFI) that
affect only a small number of nonbank institutions (finance
securities firms, regulated funds and hedge funds) with total
very high thresholds. However, the proposed treatment of large
(as opposed to their funds), stands out as an area where
additional clarity from
global regulators will be required before a full understanding
of the FSB
methodology is possible.
The paper included specific proposed guidelines for the
institutions whose large size, complexity or interconnectedness
may pose risks
for the broader financial system in the event of the firm's
size thresholds were proposed to serve as an initial filter to
companies (fincos), broker-dealers, traditional asset managers
and hedge funds
that warrant additional consideration. In addition, other
indicators include use
of leverage, complexity, counterparty risk, substitutability and
We see little or no future impact from the SIFI designation
framework among the
largest firms in the U.S., where the number of institutions with
exceeding the $100 billion threshold is very small. Among the
meet the size threshold are Fannie Mae and Freddie Mac, which
government conservatorship and unlikely to be named SIFIs. GE
deemed to be a SIFI, along with American Express and Ally
reviewed under the bank SIFI framework) are also among the
Ford Motor Credit, which will likely be viewed differently as a
result of Ford's
ownership of the finco subsidiary, also has assets exceeding
$100 billion. In
Europe, there are only a few fincos that come close to the asset
some of the largest auto captives.
Aside from Goldman Sachs and Morgan Stanley, already designated
as global SIFIs,
no other securities firms are expected to meet the proposed size
standards outlined by the FSB.
With respect to the asset management sector, the FSB proposal
appears to be
primarily focused at the fund level, which appears different
from a prior
comment by the U.S. Treasury Department's Office of Financial
which focused on systemic risk at the asset management company
level. That said,
the FSB will explore whether the focus should apply more broadly
at the fund
family or asset manager level.
We estimate that there are only 14 U.S. funds that would exceed
and thus attract additional examination of their potential
However, if the focus is at the asset manager level, the number
of U.S. firms
that could potentially be impacted would be materially higher.
whether the focus is ultimately on asset management companies or
under management, there will likely be active discussion among
market participants as to the extent to which either introduces
systemic risk or
simply transmits the views and acts of their investors.
In our view, regulated open-end and closed-end funds do not
significant source of systemic risk based on the indicators the
FSB cited as
potential signals of heightened systemic risk. Regulated
open-end funds do not
use excessive leverage, net counterparty exposures are minimal,
and, for most
asset classes, substitutability does not appear to be an issue.
closed-end funds use leverage, but it is limited and subject to
constraints under the Investment Company Act of 1940. On the
other hand, certain
large and leveraged hedge funds could pose broader systemic risk
in times of
market stress and are an appropriate area of focus.
The FSB worked together with the International Organization of
Commissions (IOSCO) to develop the proposal. The methodology is
open for public
comment until April 7.
Fitch Ratings, Inc.
70 W. Madison
Chicago, IL 60602
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
The above article originally appeared as a post on the Fitch
Wire credit market
commentary page. The original article can be accessed at
All opinions expressed are those of Fitch Ratings.
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